Sentiment on private equity market has improved greatly

• Business expectations in early-stage segment have risen sharply
• Sentiment in later-stage segment is up slightly
• Economic-policy decisions provide a boost to the VC market
• Fundraising climate remains excellent

The business climate index of the German Private Equity Barometer improved significantly in the third quarter 2016, rising by 12.0 points to 59.6 balance points. The business situation indicator rose by 10.9 points to 60.2 balance points, while the expectations indicator climbed 13.0 points to 58.9 balance points.

The business climate in the early-stage segment improved most of all. Its indicator rose by 19.7 points to 61.1 balance points in the third quarter and is now nearly as high as a year ago, when it reached a record high of 66.8 balance points. This increase occurred on the back of a significantly more positive assessment of the current business situation (+15.3 points to 58.0 balance points), but was mostly due to the sharp increase in business expectations (+24.2 points to 64.1 balance points). The improvement in the business climate in the early-stage segment went hand-in-hand with an equally steep increase in the fundraising climate, which rose to 39.7 balance points, very close its record high of 42.4 balance points.

The business climate in the later-stage segment of the equity market also improved, although more moderately. The corresponding indicator gained rose by 7.5 points to 58.7 balance points. Not only did later-stage financiers rate their current business situation more positively; they also had significantly more positive business expectations. The indicator for the current business situation increased by 8.5 points to 61.4 balance points, while the indicator for business expectations climbed 6.6 points to 56.0 balance points. Thus, the decline in sentiment observed during the first half year has stopped for the time being. The more upbeat sentiment is likely to be due mainly to the improved fundraising climate and higher demand for capital. Yet at the same time, later-stage investors are more dissatisfied than ever with the quality of their deal flows.

The development of the business climate on the German private equity market has thus turned the corner. The mood has improved again, particularly among VC investors. Some of the decisions taken by the German Federal Government have probably been a contributing factor. One of them was to further develop the current provisions on the offsetting of tax losses. Another was to exempt from taxation the INVEST grant for venture capital, under which investors could receive 20% of their investment sum back from the government in the form of a grant, and to expand it to investments in VC funds. “The federal government’s decisions are giving the VC market positive impetus and boosting sentiment on the market”, said Dr Jörg Zeuner, Chief Economist of KfW Group. Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), also emphasised: “The federal government’s latest decisions were correct and important. They signal to the venture capital industry that it wants to eliminate competitive disadvantages for start-ups and their investors.”

KfW calculates the German Private Equity Barometer exclusively for the Handelsblatt together with the Bundesverband deutscher Kapitalgesellschaften e.V.(BVK; German Private Equity and Venture Capital Association). You can find a detailed analysis with a spreadsheet and graph for the latest German Private Equity Barometer at www.kfw.de/gpeb.